Cookie Maker Margin to Improve on Cheaper Wheat Prices

Cheap Wheat Buoys M. Dias Branco Cookie Profit
Raw materials such as grain, vegetable oil and sugar accounted for 69 percent of first-quarter expenses, according to the company. Wheat made up more than half the total. Photographer: Adriano Machado/Bloomberg

M. Dias Branco SA, the cookie- and pasta-maker providing the top return among Brazilian food producers, is counting on falling wheat prices to help boost profit margins in 2013.

Harvests are set to rebound after the U.S. drought sent wheat to a four-year high in 2012, Chief Financial Officer Geraldo Luciano Mattos Jr. said. M. Dias Branco responded to that pinch by passing on costs to shoppers, fueling a 66 percent rally in the 12 months through yesterday.

Now, with inflation squeezing consumer buying power, cheaper ingredients for Adria-brand macaroni and Zabet crackers would ease pressure on profits at the Eusebio, Brazil-based company. The margin on earnings before interest, taxes, depreciation and amortization fell for four straight quarters to a low of 15.8 percent in the three months ended March 31.

“Our biggest cost has been wheat,” Mattos said in a May 29 telephone interview. “We had this cost pressure in the first quarter, it has passed now. Wheat should go down in price and in the second half of the year, we are working to maintain, if not surpass, Ebitda margins.”

M. Dias Branco has been buoyed by acquisitions in 2011 and 2012 that allowed the company to branch into making instant noodles and cakes. Its shares were helped by inclusion yesterday in the MSCI Brazil Index, a benchmark for equities in Latin America’s largest economy.

Food Leaders

The past year’s gain was the most among Brazilian food companies, based on data compiled by Bloomberg, and trounced a 1 percent advance for the Ibovespa index.

That left the shares trading yesterday at 19.2 times estimated 2013 earnings, compared with food processors BRF SA at 23 and Marfrig Alimentos SA at 24, according to data compiled by Bloomberg. The stock was little changed at 91.13 reais at the close in Sao Paulo.

M. Dias Branco said that it had a 26.6 percent share of the cookie/cracker and pasta markets in the northeast of Brazil earlier this year. It’s a region where crackers are eaten daily at breakfast and pasta with both lunch and dinner, alongside the rice and beans that are staples of diets elsewhere.

Raw materials such as grain, vegetable oil and sugar accounted for 69 percent of first-quarter expenses, according to the company. Wheat made up more than half the total. Expenses surged 26 percent in the three months through March 31, outpacing a 17 percent gain in sales, M. Dias Branco said.

2012 Surge

That was a hangover from wheat prices reaching $9.4725 a bushel last year on the Chicago Board of Trade as the U.S., the world’s leading exporter, endured one of its worst droughts on record. The cost has been decreasing in 2013 and should keep dropping as the harvest gets under way, said Mattos. Wheat futures for July delivery closed at $7.0875 a bushel yesterday.

High-priced grain in stock was used in the first quarter to make crackers and pizza dough, hurting margins, according to the company. While wages and operating expenses also rose, M. Dias Branco was able to mute the effect by getting shoppers to pay more -- an average of 11 percent for all products, led by 25 percent increases for wheat flour and bran.

M. Dias Branco’s lineup is broad enough, and the company big enough, that it can adapt to an economy with less growth and faster-rising prices than Brazil has had in recent years, said Chuk Wong, vice president and portfolio manager at Toronto-based GCIC Ltd., which has owned shares for more than a year.

Pasta, Biscuits

“Unless we’re talking about galloping inflation, it does have a strong ability to manage margins by passing on a lot of the costs,” Wong said in a telephone interview. “Next quarter it may have to absorb some costs. But at the end of the day, pasta and biscuits are much less price-sensitive than other products like beer.”

The challenge will be extending that pricing power as shoppers feel the pinch of annual inflation nearing the central bank’s 6.5 percent ceiling. An index of Brazilians’ consumer confidence has fallen in five of the past seven months.

“Inflation is corroding consumer income, and this could affect sales volume, even if the products are a basic necessity,” said Sandra Peres, a Sao Paulo-based analyst at Coinvalores who rates the company a hold.

Currency fluctuations are also taking a toll. The stock price dropped 3.1 percent yesterday, the most since May 2012, as the U.S. dollar strengthened against the Brazilian real. That will increase the cost of wheat in reais, Mattos said.

Growth Strategy

Acquisitions have been part of the growth strategy at M. Dias Branco, which may report sales of 3.94 billion reais in 2013, based on analysts’ estimates compiled by Bloomberg. That would be a 61 percent increase over 2010’s total. The company’s market value has doubled in the past two years to 10.3 billion reais ($4.86 billion).

M. Dias Branco bought food companies Pelagio Participacoes SA and J. Brandao Comercio e Industria Ltda. in 2011 for as much as 240 million reais, a year before buying wheat grinder and cookie-maker Moinho Santa Lucia Ltda. for a maximum of 90 million reais, according to regulatory filings.

“We want to grow in all segments,” Mattos said. “We will look for areas that have synergies with what we produce today.”

M. Dias Branco’s low debt of 485 million reais and cash flow of 131 million reais open up the possibility for more acquisitions, said Henrique Augusto Koch, an analyst at Banco do Brasil SA in Sao Paulo, who is reviewing his rating.

“The company has a good history of passing on costs,” Koch said in a telephone interview. “Given that history, I’m optimistic that it can continue to pass on a little bit more unless inflation loses control.”

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